Evasion and Injustice. The gradual increase in the use
of the inheritance tax, together with an increase in the
rates, has increased the likelihood of evasion, and has
magnified any injustices which exist in the system. With
the increase in rates, the temptation to dispose of prop-

erty before death increases. Cognizance has been taken
of this, and in many cases " transfers of property in con-
templation of death" have been made subject to the tax.
The courts have rather consistently held that the burden
of proof in such cases rested with the state, which resulted
in few proofs being attempted. A more recent develop-
ment has been legislation to the effect that all transfers of
property within a certain period previous to death shall
be considered as transferred in contemplation of death,
and hence subject to the tax. In Wisconsin the period is
six years. Recognition is sometimes made of the fact
that some successions may be made more rapidly than
others. If a son should die, for instance, and leave an
estate to his father, it is likely a second bequest will
follow much sooner than if the transfer had been in the
opposite direction. Laws sometimes provide that a sec-
ond tax will not be exacted if one has been paid within a
certain number of years.

Taxation of Gifts. The attempt to tax gifts in contem-
plation of death has led to much litigation and injustice.
The length of tune one lives after he disposes of property
has little to do with the ability of the recipient to meet
the tax burdens. Neither is there any assurance that one
year or ten years will measure the time within which
death will be contemplated. Any length of time decided
upon must be arbitrary, and much injustice will result.

But why attempt any such measurement? Since in-
heritance taxes are justified on the basis of ability to pay,
there is no good reason for treating a gift, whenever made,
any differently from a transfer of property after death.
The case is strong, indeed, for the levy of a tax upon gifts
whenever made at the same rate as one levied upon the
transfer of property at death. The time element has
little to do with the situation. A gift at one time is just
as much a fortuitous income as at some other time; it
may be just as much unexpected at one time as another;
just as much taxpaying ability exists in a gift before



326 OUTLINES OF PUBLIC FINANCE

death as in the receipt of property after death; as in the
case of an inheritance, an ability has been created which
will never again be so great. A tax upon gifts, therefore,
conforms closely to the ability to pay principle.

The taxation of all gifts would simplify present inheri-
tance tax administration, and would be conducive to a
greater degree of justice than where an attempt is made
to tax only those gifts made in contemplation of death.
The same rates should be placed upon gifts as are levied
upon inheritances, with the same exemptions as well as
the same differences for near and distant relatives or
strangers in blood.

170. Conflicting Jurisdictions Create Serious Problems.
The existence of a number of political units, whose
interests are not separate and distinct, and the attempt
of each to adopt a form of taxation designed for its own
needs, with little consideration for those of its political
neighbors, has caused many serious problems to those
seeking to secure justice in taxation. This situation has
enhanced the problem of securing just inheritance taxa-
tion, and has manifested itself in particular in the United
States, with its many political divisions. A few of the
states do not use the tax, while in the others it varies from
a half-hearted attempt to secure a little revenue from col-
lateral heirs to highly progressive rates upon all estates.
rfThe laws not only lack uniformity in respect to rates and
progression, but in the bases upon which the tax is levied.
The result is that some estates are subject to more than
one tax, while others escape the tax that they are really
expected to pay.

Domicile of Decedent. To a large extent the inheritance
tax is placed at the domicile of the decedent. Since the
burden varies to such an extent in the different states, it
becomes profitable, in the case of large estates, to change
the place of residence to a state with lenient considera-
tions toward bequests, although no change be made in
the business, or property, or economic interest. Because



INHERITANCE TAXES 327

of the increasing adoption of the income tax as a source
of state revenue, the selection of a suitable domicile will
assume an aspect of even greater importance. A state
which is lenient in the matter of income taxes, as well as
in the levy of inheritance taxes, is bidding to become a
popular place of residence for men of wealth. This is
noticeable in the Eastern states, where the states are
small and where there is a large amount of wealth. The
possibility of this result, no doubt, has had much to do
with keeping a number of states from making a greater
use of inheritance taxes. They have feared to increase
the severity of the burden beyond that of neighboring
states lest the wealthy citizens change their place of
domicile.

Situs of Property. The state frequently imposes an in-
heritance tax upon the basis of situs of the property, and
upon the personal property of individuals living in the
state. Many states go farther, and impose the tax upon
shares in domestic corporations, while many go still
farther and place the tax upon shares of corporations
within the state owned by a nonresident. Some tax the
shares at their physical location; for example, shares of
stock deposited in a bank for safe keeping, no matter
where the residence of the owner. Some have even used
indebtedness as a base that is, bonds would be taxed in
the state from which issued, no matter w r here the owner
lived or died.

The resulting complexity of the use of these diverse
attempts can easily be imagined. Two, three, four, and
even five taxes may be collected from one estate the in-
justice of which no one will deny. Suppose an individual
dies in state A, who was a citizen of state B, owned $100,-
000 worth of bonds of a corporation chartered hi state C,
the actual property of which was in state D, while the
bonds were in a safety vault in state E. The inheritance
tax law of A taxes the property of every decedent of the
state, B that of every citizen, C the bonds of corporations



328 OUTLINES OF PUBLIC FINANCE

chartered within the state, D the property where located,
and E the situs of the bonds. In this case the bonds
would bear the tax rate in force in each of the five states.
This, of course, would be an extreme case, yet examples
of double and triple taxes upon estates are not uncommon.

Stability and Uniformity Desirable. This chaotic con-
dition is far from satisfactory. The expense and delay in
settling estates is often increased many fold, while the
rulings of the courts have become so numerous and so
hair-splitting as to add greatly to the complexity of the
situation. The instability of the various laws, moreover,
is not conducive to the comfort of investors. Nineteen
states modified their laws in 1919. The law in New York
State has been amended more than forty times since its
adoption in 1885. One never knows what may be the
condition a few years hence. While no single state im-
poses an excessive burden upon estates, yet the piling up
of double and multiple taxes may develop an excessive
burden and even necessitate a dismemberment of the
property in order to be able to pay the tax.

While a better situation is unquestionably desirable, a
remedy seems far to seek. Some uniform system which
would eliminate double taxation would be the logical
solution. To secure cooperation among the states each
with its own selfish interests paramount- to the end of a
uniform method of inheritance taxation is too much even
to hope for. The recent reentrance of the Federal gov-
ernment into this field of revenue, however, presents a
possible solution, improbable as it may seem. Uniformity
could be secured by the various states giving up their
diversified systems, and allowing the Federal government
to occupy the field with a uniform law. The machinery
of transfer located in the states would, of course, have to
be used, and the Federal government could distribute
back a part of the revenue collected. Rates, in this case,
could be high enough to make the system a powerful
source of revenue. Practically unsolvable problems arise,



INHERITANCE TAXES 329

however, in securing the consent of the states, and in
finding some practical basis for redistributing the amount
collected back to them.

Advantages of Tax. In spite of the difficulties, however,
the inheritance tax is destined to play a role of much
greater importance in the fiscal systems of our states, and
probably in that of the Federal government, than it ever
has in the past. Its outstanding advantages cannot but
be favorable to its further extension. The opportunity
for fraud and evasion is minimized, since the machinery
of the courts must be used in making the transfer of
property. The receipts come in throughout the year,
with few payments compared with the amount of revenue
received. For large political units, moreover, the yield is
remarkably uniform. It is a tax well suited to provide
an elastic feature a rise in the rates will not cut off the
source of the tax by causing fewer deaths, although it
may lead to greater evasion. The incidence of the tax,
moreover, is certain a definite amount is taken from the
estate before it reaches the recipient the burden falls
upon him, and he cannot shift it. It is a tax which
conforms well to Adam Smith's four canons: it falls
according to ability, is certain, is paid at the time
most convenient, and should be an inexpensive tax to
collect.

171. The Federal Government Has Not Regularly Used
Inheritance Taxes. The inheritance tax has found a place
in the fiscal system of the Federal government at several
different times. Generally this has been in times of emer-
gency, when the primary object was to secure more rev-
enue. As early as 1794 recommendations were made for
a tax upon the succession of property at death. The first
law which placed a tax of this nature was passed in 1797,
and remained in force until 1802. Direct heirs were
exempt from the tax, while others were taxed only on the
excess above $50. The rate was twenty-five cents when
the amount was not more than $100; from $100 to $500



330 OUTLINES OF PUBLIC FINANCE

it was fifty cents; the tax on $500 was one dollar, with
an additional dollar for each increase of $500. While this
was perhaps more the nature of a fee, we find, early in the
levy of a rate upon legacies, the recognition of the prin-
ciples of progressive rates, and a differentiation on the
basis of relationship.

Tax of 1862. Other recommendations were made after
the repeal of this law, but Congress enacted no similar
legislation until 1862. This levy was of two kinds one
known as a legacy tax, and the other as a succession tax.
The rates were progressive, ranging from 1 per cent to
6 per cent, with an exemption of $1,000 allowed. They
were repealed in 1870, the revenue having increased from
about a half million dollars the first year of use to nearly
three million dollars the last year. This last represented
a little less than 2 per cent of the total internal revenue
receipts.

Tax of 1898. Taxes upon inheritances and gifts were
included in the ill-fated income tax law of 1894. In 1898,
however, they were again introduced as a means for
securing additional revenue. The law, which was re-
pealed in 1902, differentiated between degrees of rela-
tionship, and used progressive rates which went as high
as 15 per cent for collateral heirs. The act was productive
of revenue; in 1902-03 it supplied more than 2 per cent
of the internal revenue receipts. As an aid to secure
revenue to finance the Great War, inheritance taxes were
again called into use. These will be discussed in the
chapter dealing with emergency financiering.

There is much disagreement as to the use the Federal
government should make of the inheritance tax. Many
authorities hold that this field of revenue should be left
entirely to the exploitation of the states, the expenditures
of which are continually on the increase, while their
sources of income are more or less limited. On the other
hand, the needs of the Federal government have increased
greatly, and these must be met from revenue. The larger



INHERITANCE TAXES 331

the percentage that can be collected from inheritance
taxes, the less there will be to be collected from some
more burdensome source. There is no good reason why
both the Federal government and states should not use
the tax, nor why they should not cooperate in making
the tax uniform and just.

172. Inheritance Taxes Are Important in the Fiscal Sys-
tems of Some States. Ever since Pennsylvania adopted
the principle of the inheritance tax in 1826, it has been
embodied in the fiscal system of one or more of the
American states. Its importance has greatly increased,
however, during the last twenty-five years, until in 1920
forty-five of the forty-eight states were using some form
of the tax. As the needs for revenue become more
pressing, as the legislators become educated to the
merits of the tax, and as more cooperation can be de-
veloped among different states, a much more thorough
use of this form of taxes can be expected as a source of
state revenues.

Examples of State Taxes. The inheritance tax laws in
our states have taken on nearly every conceivable form.
The early Pennsylvania tax was 2J/ per cent placed upon
the transfer of property to collateral heirs. An exemption
of $250 was allowed. Two years later Louisiana placed
a tax on property going to foreign heirs. Gradually other
states were added to the list, and as the years went by
amendment was placed upon amendment, the courts be-
came more favorable, until the system as it is found at
present resulted. Space does not permit a survey of the
laws found in the various states, nor, because of the
changes which are imminent in many states, would any
survey, which might be made now, be of any particular
value in a few years. The outstanding features of only a
few laws will be noted.

The state of New York, through the amendment
adopted in 1911, is considered to have one of the most
model inheritance tax laws. An exemption of $5,000 is



332 OUTLINES OF PUBLIC FINANCE

made to direct heirs, and $1,000 to collateral heirs. The
rates are as follows:

Above exemption, up to $ 50,000, 1% for direct, 5% for collateral
From $ 50,000 " " 250,000, 2% " " 6% "
250,000 " " 1,000,000, 3% " " 7% "
All above $1,000,000, 4% " " 8% "

The law also seeks to avoid double and multiple taxation,
such as was described above. The estates of residents are
taxed upon tangible property within the state and intangi-
ble property wherever it may be situated. No tax is
placed upon the intangible property in the estates of non-
residents, and only their tangible property within the state
is taxed. The intangible property includes such items as
money, bank deposits, shares of stock, bonds, notes,
credits, etc. Bequests to religious, educational, and char-
itable institutions, whether within or without the state,
are exempt from the tax. Recent legislators, however,
have shown some disposition to recede from this tolerant
attitude, and some of the former exemptions have been
removed, as, for example, the shares of stock of domestic
corporations and New York national banks in the hands
of nonresident decedents.

Some of the other states have modified their laws so
as to conform more nearly to justice. No doubt the un-
selfish influence of New York has had its effect. Califor-
nia was one of the first states to follow the example, yet
went much farther in the steepness of rates. The rate on
bequests to direct heirs is progressive from 1 to 5 per
cent, while to collateral heirs it ranges from 2 to 25 per
cent. The fact that most states have introduced the tax
by placing it first upon collateral inheritances and then
gradually extending it to include direct inheritances, is
still evident. A few years ago many states used the col-
lateral tax, with no tax upon the direct transfers of prop-
erty, and this is still true in a few cases. Gradually, how-
ever, direct inheritances are being included in the tax,

although with higher exemptions and lower rates than for
collateral inheritances, until it is likely that the time is
not far distant when direct inheritance taxes will be used
in all the states where the tax on collateral transfers is
now found.

The abundance of revenue from other sources has made
the American states somewhat slow in seizing upon the
inheritance tax as a part of their fiscal systems. The tax
is one, however, that appeals to public sentiment, and
without doubt it has come to stay. As years go on it will
be found to occupy a place of increasing Importance in
our sources of revenue.

173. The Inheritance Tax Is Used Extensively Abroad.
A study of the use of the inheritance tax in foreign
countries reveals how dilatory America has been in seizing
upon the principle. The tax has been extensively used in
Switzerland, Spain, Sweden, Holland, Italy, Germany,
Greece, France, Russia, England, Ireland, Canada, Aus-
tralia, Belgium, Portugal, Austria, and many other coun-
tries. Highly progressive rates are found in many of these
countries, particularly in France, England, Australia, and
Switzerland. The tax seems to have had its broadest de-
velopment in the more democratic countries.

To go into the study of the inheritance tax in these
foreign countries would take us too far afield. A brief
glance at a few of them, however, will be worth while for
the purpose of comparing them with the taxes used in the
United States. England has used the tax since 1780.
Amendments have been made until the tax takes three
forms: one on the general estate, one on the personal
property, and one on real estate. The amounts are grad-
uated and taxed at a progressive rate, ranging from 1 to
23 per cent. In France the maximum rate imposed upon
collateral inheritances is over 20 per cent, while the maxi-
mum rate upon direct estates is about 5 per cent. In
Italy and Germany the rates have been somewhat higher.
The Australasian and Canadian provinces have followed

the lead of the Mother country, and are making extensive
use of the tax with steeply progressive rates.

Since the inheritance tax so admirably supplements in-
come taxes, and since each has become so deservedly
popular, it is not too much to predict that each will hold
a place of vital importance in the revenue systems, not
only of Federal governments, but also of the provinces
and states. Because of its backwardness in the past the
United States may be looked upon to furnish examples of
the most rapid extension of the use of inheritance taxes
during the next few decades.